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Thinking about buying a contaminated property? Make sure you know what you’re buying…

It has never been more important for a prospective purchaser of a contaminated property to ensure they understand and size the environmental risks associated with the property before going firm on a deal. Following a series of recent environmental orders and decisions, it is now clear that companies and their directors and officers can be required to pay considerable funds to clean up contamination that they were not responsible for causing.

The Ministry of the Environment and Climate Change (MOECC) has broad powers to issue orders to prevent harm to the environment, or to require steps to be taken to clean up the environment. This power is rooted in Ontario’s environmental protection legislation, which was developed around the ‘polluter pays’ principle. That principle seeks to ensure that those who are responsible for causing or contributing to pollution should be responsible for the costs to clean it up. As such, the MOECC has the power to impose orders on both current and former owners and occupants, and on those who have or had ‘management or control’ over a property or undertaking.

However, over the past several years, the MOECC has taken an expansive view of what ‘management or control’ means, and who it can name in an order on that basis. The result has been a series of successive orders that reach well beyond the ‘polluter pays’ principle to impose costly obligations on companies and individuals who had little (or nothing) to do with the contaminating activities.

In Kawartha Lakes v. Ontario, the MOECC issued an order against a municipality whose land was contaminated by a neighbouring property. The municipality, which did not cause or contribute to the contamination, and could not have been in a position to prevent it, was required to carry the full costs of cleaning up the property. In its challenge to the order, the municipality was prevented from calling evidence to show who was at fault for the spill. The municipality appealed first to the Divisional Court and then to the Court of Appeal – which ultimately held that fairness was not a relevant consideration for the MOECC when issuing orders under the current legal regime (see paras. 15-21 of 2013 ONCA 310). In the wake of Kawartha Lakes, it is now firmly established that the MOECC can issue orders against those who are completely faultless.

In Baker v. Director, the MOECC issued an order against thirteen innocent former directors and officers of a bankrupt company that was alleged to have caused contamination. The order made the former directors and officers personally responsible to pay for costly monitoring and remediation work. Twelve of those directors and officers sought to have the requirements of the order stayed until their appeal of the order could be heard. They failed – and rather than face years of unrecoverable costs, eight of the former directors settled with the MOECC for $4.7 million.

More recently, the MOECC has taken its power even further, suggesting that (absent statutory reform) there may be no limits to the scope of persons who could fall within the ambit of its power. In McQuiston v. Ontario, a former tenant of an industrial property was alleged to have caused contamination and ordered to investigate and remediate. However, the MOECC also named several apparently innocent individuals and companies, including:

a British resident, who had recently inherited the property from his father;

that British resident’s accountant, who had been assigned a power of attorney in order to sell the property;

a real-estate brokerage, who had entered into a listing agreement with the accountant for the purpose of selling the property; and

two individual directors of the listing brokerage.

Apparently placing a lockbox on the door of a contaminated property is now sufficient to expose you to significant regulatory liability on the basis that you have ‘management or control’ of that property.

What does this mean for the prospective purchaser of a contaminated site? Now, more than ever, such purchasers must ensure that they know what they are getting into and take necessary steps to protect themselves. The fact that a purchaser had nothing to do with the contaminating operations or activities will have no bearing on that purchaser’s exposure to costly regulatory orders. The protective steps to be taken will depend on the circumstances, but will often include ensuring (at a minimum) that the purchaser:

obtains all environmental reports or other information relating to the condition of the property in the vendor’s possession or control, together with a contractual right to rely on any such reports;

obtains representations and warranties from the vendor as to the condition of the property and the completeness and accuracy of the information provided;

obtains indemnities from the vendor to address environmental exposure (although the value of such indemnities will be limited by the vendor’s ability to pay);

builds-in a contractual right (and sufficient time) to investigate the property and a right to walk away from the deal if they are not satisfied as to the environmental condition; and

retains an independent environmental consultant to review any reports received by the vendor and to carry out environmental investigations.

This update is provided as a courtesy for your general information and does not constitute legal advice. Every organization is unique and may also be subject to other laws not contemplated in this update. This update should not be relied on as a substitute for legal advice which necessarily must be specific to your organization, your objects, your operations, and your structure. If you have any questions about this information please contact one of the lawyers listed above.